The U.S. economy, bolstered by business investment, grew at a solid annual rate of 3% in the third quarter. It marks the first time in three years that growth has hit at least 3% for two consecutive quarters.

The Commerce Department reported Friday that the July-September advance in the gross domestic product — the country’s total output of goods and services — followed a 3.1% rise in the second quarter. It was the strongest two-quarter showing since back-to-back gains of 4.6% and 5.2% in the second and third quarters of 2014.

The economy accelerated this summer despite the impact of hurricanes Harvey and Irma, which many private economists believe shaved at least one-half percentage point off growth.

The 3% growth rate for third-quarter GDP and the 3.1% increase in the second quarter followed a much weaker 1.2% increase in the first quarter.

In the third quarter, consumer spending slowed slightly to 2.4% from a sizzling 3.3% in the second quarter. The slowdown was offset to some extent by a strong 8.6% gain in business investment in equipment and an increase in business rebuilding of inventories, which added 0.7 percentage point to third-quarter growth.

Consumer spending was “supported by the spike in auto sales related to the replacement of damaged and destroyed vehicles” after the hurricanes, says Royce Mendes, director and senior economist at CIBC World Markets, in a note.

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Other areas of the report showed weakness. Government spending fell for a third straight quarter, dropping 0.1%. Residential construction fell at a 6% rate following a 7.3% rate of decline in the second quarter. But trade added 0.4 percentage point to growth as exports grew at a 2.3% rate while imports fell 0.8%.

Overall, markets haven’t much reacted to the strong GDP results, says Mendes, because “expectations had been increasing in recent days following some strong data releases.”

He expects that the quarter’s strong growth “will leave Fed officials with few reasons to hold back on a rate hike come December.”

In an economics report, Derek Holt, vice-president and head of capital markets economics at Scotiabank, says the main takeaway is that “the U.S. economy is now out of room to grow without slipping into excess demand conditions and stoking firming price pressures, and hence more Fed policy risk than is presently priced into fed fund futures.”

Growth outlook

Many analysts believe growth in the current quarter will come in around 2.7%.

The House on Thursday gave approval to a Republican-proposed budget that would provide for $1.5 trillion in tax cuts over the next decade. Administration officials have said the tax cuts will spur faster growth, and the faster growth will erase much of the cost of the tax cuts. Democrats and many private economists have challenged that forecast.

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Going forward, private economists believe 3% annual gains will be hard to achieve for an economy facing a slowdown in productivity and an aging workforce.

Paul Ashworth, chief U.S. economist at Capital Economics, said he was looking for growth of 2.1% this year, and, assuming that the Trump administration is successful in getting at least a modest tax cut measure through Congress, growth in 2018 could accelerate to 2.5%. But he said continued increases in interest rates by the Federal Reserve will likely trim growth to just 1.5% in 2019.

Building on his earlier statement, Holt says, “This is not the point at which to be applying demand stimulus — if we actually get that out of tax reforms […] — without expecting the Fed itself to sterilize the outcome and by corollary for the U.S. dollar and bond market to do likewise. This is one of the key arguments I’ve always used to dampen expectations that so-called Trumponomics can serve to ignite growth versus adding to late-cycle imbalances.”

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Originally published on Advisor.ca
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